-Given the Factors Pricing Assets Above and a Risk-Free Rate

question 10

Multiple Choice

$\begin{array}{|l|l|l|l|l|}\hline & \text { Factor 1 } & \text { Factor 2 } & \text { Factor 3 } & \text { Factor 4 } \\\hline \text { Risk premium } & 3.8 \% & 4.4 \% & 5.7 \% & 5.9 \% \\\hline \text { Asset sensitivity } & -1.2 & -1.6 & 1.9 & 0.6 \\\hline\end{array}$
-Given the factors pricing assets above and a risk-free rate of return of 6%,what is the expected return of the asset using the APT?

• A) \( 2.49 \% \)
• B) \( 2.76 \% \)
• C) \( 3.13 \% \)
• D) \( 8.77 \% \)

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Definitions:

Cash Flow Hedge

A financial strategy used to manage risks associated with fluctuations in cash flows by using a hedge instrument to offset potential losses or gains.

Spot Exchange Rates

The present rate at which one currency is traded for another with immediate effect.

Net Income

The overall earnings of a firm once expenses and taxes are subtracted from its total revenue.

Cash Flow Hedge

A financial strategy used to manage the risk of fluctuations in cash flows caused by changes in foreign exchange rates, interest rates, or commodity prices.